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How to Create a Financial Plan For Small Businesses and Startups

September 21, 2022
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So, you have a great business idea and are ready to start. Congrats! But before you start making decisions or spending money, creating a financial plan is crucial.

Financial planning may seem daunting, but it doesn't have to be. And it's definitely worth the effort. A good financial plan will help you make intelligent decisions about allocating resources and managing your money.

Not quite sure where to start? Don't fret. We're giving you the 411 on creating a financial plan for your small business or startup.

Let's get started.

What is a financial plan?

Before we learn how to create a financial plan, let's first define what a financial plan is. A financial plan is a roadmap that outlines your business's financial goals and how you intend to achieve them. For example, your financial goals might include earning revenue, achieving profitability, or growing your business at a specific rate.

Your financial plan will also detail how you plan to use your financial resources, such as your revenue, investments, and credit. And it will include information on your expected expenses, such as operating costs, marketing expenses, and payroll.

Why is financial planning important?

It improves strategic thinking on how to use your resources and what results you should expect effectively

When you create a financial plan, you're forced to think strategically about using your resources best to achieve your desired results. This strategic thinking process will help you make better decisions about where to allocate your resources and what results you can expect.

Let's say you're launching an app that provides instant messaging for business owners and their teams. First, you'll need to consider how much it will cost and how to develop the app, how you'll generate revenue, what your marketing budget should be, and what your overhead costs will be. Without this, it would be easy to overspend or underestimate expenses and revenues.

It aids in better management of your company

To effectively manage your team, you must clearly understand your financial situation. This way, you can allocate the necessary resources to each department and make informed decisions about where to cut costs. 

For example, if you know your marketing budget is limited, you'll be more strategic about allocating resources and better understand your project spend management. You may work with your marketing manager to create a social media posting schedule and an effective social media campaign that doesn't require a lot of money. Or you may decide to invest in SEO, so your website appears higher in search engine results.

The forecast determines your short- and long-term goals

A financial plan can help you set realistic goals for your business. Without a plan, it can be easy to go from brainstorming business ideas to getting caught up in running your new business while losing sight of your long-term goals.

Creating a financial plan will force you to think about where your business will be in the future and what steps you need to take to get there. In addition, this process will help you set realistic goals that you can work towards over time.

For example, let's say your goal is to increase the profits of your business text messaging app business by 30% in the next year. To achieve this goal, you'll need to create a plan outlining how to generate additional revenue and reduce expenses. This may include strategies like increasing prices, launching a new product, or reducing overhead costs.

It serves as a springboard for constructing a plan

Once you've created a financial plan, you can use it as a springboard to develop a plan of action for your business. This action plan will outline the steps you need to take to achieve your financial goals.

Let's say your goal is to attain a certain amount of customer growth in the next year. To achieve this goal, you'll need to create a plan outlining how to acquire new customers and retain existing ones. This may include strategies like improving your marketing efforts, offering discounts or loyalty programs, or providing excellent customer service.

It establishes reasonable expectations for your business

As a business owner, it's easy to become over-optimistic about the potential for your business. However, setting realistic expectations for your company can be difficult without a financial plan.

Creating a financial plan will help you develop more realistic expectations for your business by forcing you to consider the costs and revenues associated with your desired results.

What makes successful financial planning?

Now that you know what a financial plan is, you might be wondering what makes for a successful one. To do this, you must understand the various components of a financial plan.

Profit and loss statement

A profit and loss statement, also called an income statement, shows your business's revenue, expenses, and profits over a period of time. This information is critical for understanding whether your business is profitable and how much cash you have on hand.

Personnel plan

A personnel plan outlines the number of employees you need, their roles, and how much you'll pay them. This information is essential for understanding your business's labor costs and ensuring that you have the right people to meet your business goals.

Balance sheet

A balance sheet shows your business's assets, liabilities, and equity. This information is essential for understanding your business's financial health and net worth.

Cash flow statement

A cash flow statement shows how much cash your business is bringing in and spending over a period of time. This information is critical for understanding your business's short-term financial health and determining whether you have enough cash on hand to meet your business's needs.

Sales forecast

A sales forecast is an estimate of how much revenue your business will generate over a period of time. This information is vital for understanding your business's growth potential and making informed decisions about allocating your resources.

Business ratios and break-even analysis

Business ratios and break-even analysis are tools used to assess your business's financial health and performance. This information is vital for understanding your business's strengths and weaknesses and making informed decisions about improving your business's bottom line.

Exit strategy

An exit strategy is a plan for how you will sell or otherwise dispose of your business in the future. This information is essential for ensuring that you maximize your business's value and make informed decisions about its future. Some common exit strategies include selling the company to a third party, passing it down to family members, or taking it public through an initial public offering (IPO).

How to start creating a financial plan for your small business

Make a strategy plan

The first step is to make a strategy plan. This will help you focus on your goals and create a roadmap for how to achieve them. This should include all the financial goals you want to accomplish in the short-term and long-term.

Make financial forecasts

The second step is to create financial forecasts. This will help you anticipate how much money you'll need to achieve your goals and make informed decisions about where to allocate your resources. Financial forecasting can be done using Excel or another software program.

Prepare contingency plans

The third step is to prepare contingency plans. This will help you plan for unexpected events that could impact your small business. Contingency planning should include:

  • Identifying risks.
  • Estimating the costs of those risks.
  • Developing strategies to mitigate them.

Goals should be monitored and compared

The fourth step is to monitor your goals and compare them to actual results. This will help you track your progress and make changes to your plan as needed. Monitoring should be done regularly, such as monthly or quarterly.

Financial Planning Tips for Startups

Starting a business is an exciting time, but it can also be a stressful one. There are so many things to think about and plan for, here are our top tips for financial planning.

Take easy steps

Remember, you don't have to complete your financial plan simultaneously. Instead, you can break it down into smaller, more manageable steps that you can complete over time. For example, you can start by creating a budget and then set up a system for tracking your expenses.

Prepare for a variety of scenarios

It's essential to create a financial plan to help weather any storm. This means preparing for various potential scenarios, both good and bad. For example, you should have a plan for what you'll do if your business experiences unexpected growth or sudden setbacks.

The best way to do this is to create a business model canvas. This is a tool that startup founders can use to map their business plans and track progress over time.

Some key things to include in your business model canvas are:

Ask the most important "What ifs"

This will help you create a plan that is both comprehensive and flexible. 

This means that you should ask yourself a variety of "what if" questions, such as:

  • What if my revenue decreases?
  • What if my expenses increase?
  • What if my customers don't buy what I'm selling?
  • What if I can't get the funding I need?
  • What if my business fails?

Your Expenses Aren't Going to Stay the Same, Prepare

As your small business or startup grows, your expenses will likely change. This could be due to increased inventory costs, more expensive office space, or hiring additional staff. Your financial plan must accommodate these changes. Expense software like QuickBooks can help you track your spending and make necessary adjustments to your budget.

Make a plan for where your money will come from

You can't create a financial plan without knowing where your money will come from. This means looking closely at your expected revenues and identifying potential funding sources, such as loans, investments, or grants.

Take into account all employee costs

Your team is one of your most important assets, and their costs should be included in your financial planning. Some employee costs you'll need to consider are:

  • Salaries: This is the most obvious cost, but don't forget to account for things like bonuses and raises.
  • Benefits: This can include health insurance, dental insurance, vision insurance, pet insurance and other benefits.
  • Training: You'll need to invest in training your employees to do their job well.
  • Retirement plans: Ensure you're offering a retirement plan to attract and retain top talent.
  • Office space: Are your employees working from home, or do you have an office? How much space do you need, and how much will it cost?
  • Equipment: Do your employees need laptops, desks, chairs, or other equipment?

You should also put aside money for yourself. After all, you're running a business and deserve compensation for your time and efforts.

Review your financial plan regularly

Your financial needs will change over time, so it's essential to review your financial plan regularly. This will help you ensure that your plan is still relevant and continues to meet your changing needs.

Share your financial plans with others

Don't keep your financial plans to yourself. Instead, make sure to share them with your team, so everyone is on the same page. This will help ensure that everyone is working towards the same goals and that they understand the financial constraints of the business.

Following these tips, you can create a successful financial plan for your small business or startup.

Key Takeaway: Make financial planning a recurring part of your business

So there you have it. Financial planning is critical to running a successful small business or startup. By taking the time to create a financial plan, you can make informed decisions about where to allocate your resources and how to achieve your goals. And by reviewing your financial plan regularly, you can ensure that it continues to meet your changing needs.

Good luck and happy planning!

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